The self-contagion effect of audit quality causing stock price crash risk*

초록

This paper examines the relationship between the stock price crash on other firms and the focal firm’s audit quality by the same auditors, representing a self-contagion effect of a low-quality audit. It has been reported that the opacity of financial statements brings about stock price crash. Not only managers but also auditors are responsible for this opacity because auditors should find out the bad news that managers tend to withhold. This paper, therefore, predicts that discretionary accruals of focal firms would be great when stock price crash occurs in other auditee firms of their auditor, taking advantage of the fact that auditors provide similar audit quality. The results are as follows. First, we find that discretionary accruals of focal firms are positively related to stock price crashes on other auditee firms of the same auditor. Second, however, we cannot find this relationship when the focal firms experience stock price crashes as well. These two findings show that the self-contagion effect of low-quality audits works differentially according to firms’ opacity. This study finds the indirect evidence that auditors are one of the main reasons for stock price crash risk and it can be new criteria for audit quality such as big4 or industry-specialist auditors. Also, the results have a practical implication that investors should pay attention to unknown bad news when the stock price crash occurs in other auditee firms of the same auditor. © 2020, Korean Accounting Association. All rights reserved.

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